The plaintiffs in State National Bank of Big Spring, Texas, et al. v. Lew, et al. want the D.C. federal district court to hold a status conference to determine how their case “can be most efficiently adjudicated” in light of the CFPB’s petition to the D.C. Circuit for rehearing en banc in PHH.

In July 2016, the D.C. federal district court rejected the plaintiffs’ attempt in State National Bank of Big Spring to invalidate the actions taken by Director Cordray while he was a recess appointee.  The district court deferred ruling on the plaintiffs’ separation of powers constitutional challenge pending a decision by the D.C. Circuit in PHH.  The D.C. Circuit subsequently ruled in PHH that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional.

In their unopposed motion for a status conference, the plaintiffs in State National Bank of Big Spring argue that judicial economy would be served if the district court “were to pave the way for consolidation of this case with PHH on appeal by entering partial summary judgment in favor of Plaintiffs on their standalone claim that the Dodd-Frank Act’s for-cause removal provision …is unconstitutional.”  The plaintiffs assert that the district court could then certify the partial summary judgment order to the D.C. Circuit under 28 U.S.C. Section 1292(b) as “involv[ing] a controlling question of law as to which there is a substantial ground for difference of opinion,” thereby allowing the D.C. Circuit “to efficiently resolve in a single sitting all pending merits questions within its jurisdiction pertaining to the standalone constitutionality” of the for-cause removal provision.  Plaintiffs’ remaining claims would be reserved in the district court for further adjudication following en banc resolution of PHH.

The plaintiffs indicate in their motion that while the government defendants do not oppose their request for a status conference, the defendants do oppose certification.  They also note that if the two cases are not consolidated, the D.C. Circuit could vacate the panel’s decision on RESPA grounds and avoid the constitutional question.  According to the plaintiffs, that would leave the district court in the “unenviable position” of having to resolve the constitutional issue.

The issue of the CFPB’s constitutionality reemerged last week in court and Congress.

On the judicial front, the U.S. Court of Appeals for the D.C. Circuit, in State National Bank of Big Spring, Texas, et al. v. Lew, et al., reversed the district court and ruled that the bank had standing to challenge the  constitutionality of the CFPB and Director Cordray’s recess appointment.  The D.C. Circuit did not, however, rule on the merits of the bank’s constitutionality claims.  (In January 2014, in the CFPB’s enforcement action against Morgan Drexen, a California federal court rejected on the merits a challenge to the CFPB’s constitutionality.)

The case before the D.C. Circuit was originally filed in June 2012 by State National Bank of Big Spring (SNB) and two D.C. area non-profit organizations that joined SNB as plaintiffs.  Eleven Republican state Attorneys General subsequently joined as plaintiffs on the amended complaint filed in September 2012.  The original complaint challenged the constitutionality of Director Cordray’s recess appointment.  It also alleged that the CFPB’s structure and authority violated the Constitution’s separation of powers and that the Financial Stability Oversight Council (FSOC) created by Dodd-Frank was unconstitutional.  The AGs did not join those portions of the amended complaint and instead only joined a newly-added challenge that had nothing to do with the CFPB but dealt with their states’ status as potential creditors of a failed financial institution in the event of an “orderly liquidation” under Title II of Dodd-Frank.  In August 2013, the district court granted the CFPB’s and other defendants’ motion to dismiss on standing and ripeness grounds.

The D.C. Circuit’s decision consisted of the following four rulings:

  • SNB has standing to challenge the CFPB’s constitutionality and the challenge is ripe because SNB is regulated by the CFPB.  The court used the CFPB’s Remittance Rule as an example of the CFPB’s exercise of its regulatory authority to impose new obligations on SNB.  SNB had alleged that the increased compliance costs resulting from the Remittance Rule, coupled with an alleged loss of business, provided sufficient injury to establish standing.  According to the court, SNB was not required to violate the Remittance Rule and trigger an enforcement action to challenge the legality of the CFPB itself.  The D.C. Circuit remanded to the district court for it to consider the merits of SNB’s constitutionality claim.
  • SNB has standing to challenge the constitutionality of Director Cordray’s recess appointment and such challenge is ripe for the same reasons.  While it reversed and remanded to the district court to consider the merits of the issue in light of the U.S. Supreme Court’s decision in Noel Canning, the D.C. Circuit also noted that it “leave[s] it to the District Court to consider the significance of Director Cordray’s later Senate confirmation and his subsequent ratification of the actions he had taken while serving under a recess appointment.”
  • SNB does not have standing to challenge the FSOC because SNB could not rely on the doctrine of “competitor standing” to argue that the designation of another entity as “too big to fail” indirectly harmed SNB by creating a “reputational benefit” for the competitor.
  • The State AGs do not have standing to challenge Dodd-Frank’s order liquidation authority and the claim is not ripe.  Among the reasons given by the D.C. Circuit was that it was premature for a court to consider the legality of how the government might wield its orderly liquidation authority in a potential liquidation or reorganization.

On the Congressional front, the CFPB’s constitutionality was the focus of testimony given to the Senate Judiciary Committee at a hearing last week entitled “The Administrative State v. The Constitution: Dodd-Frank at Five Years.”  Among the witnesses was Professor Neomi Rao of George Mason University School of Law.  In her written testimony, Professor Rao provided extensive support for the position that the CFPB is unconstitutional.  According to Professor Rao, because of its “super independence and expansive delegated authority, the CFPB’s structure undermines the Constitution’s checks and balances.”  She also asserted that the CFPB’s “constitutional infirmities have predictably resulted in agency overreach on matters of fundamental importance to the consumer financial marketplace.”  (The written testimony of the other witnesses is available on the Judiciary Committee’s website.)

Briefs were filed last week by the “private” and “state” appellants in State National Bank of Big Spring, Texas, et al. v. Lew, et al., the case on appeal to the U.S. Court of Appeals for the D.C. Circuit that includes a challenge to the CFPB’s constitutionality.  In August 2013, the district court granted the CFPB’s and other defendants’ motion to dismiss on standing and ripeness grounds.  

The private appellants are State National Bank of Big Spring (SNB) and the two D.C. area non-profit organizations that joined SNB as plaintiffs when the original complaint was filed in June 2012.  The state appellants are the eleven Republican state Attorneys General who subsequently joined as plaintiffs on the amended complaint filed in September 2012.  In the original complaint, the private plaintiffs challenged the constitutionality of Director Cordray’s recess appointment and also alleged that the CFPB’s structure and authority violated the Constitution’s separation of powers.  The AGs did not join that portion of the amended complaint and instead only joined a newly-added challenge that had nothing to do with the CFPB but dealt with their states’ status as potential creditors of a failed financial institution in the event of an “orderly liquidation” under Title II of Dodd-Frank.  

The private appellants’ brief to the D.C. Circuit is primarily directed at challenging the district court’s holding that SNB lacked standing to challenge the CFPB’s constitutionality based on SNB’s alleged exit from the mortgage business and reduction in its remittance transfer business because of the increased risks and compliance costs resulting from the CFPB’s regulations and UDAAP authority.  According to SNB, its alleged lost profits and increased compliance costs are sufficient injuries to establish standing. 

According to the state appellants, because Title II gives the FDIC, as receiver for a failed financial institution in an orderly liquidation, discretion to discriminate among similarly situated creditors, all creditors lose the right to be repaid equally with other similarly situated creditors.  In their brief to the D.C. Circuit, the state appellants argue that, contrary to the holding of the district court, this loss of legal rights represents an immediate injury to their states as potential creditors that confers standing and also makes their claims ripe.

 

A Washington, D.C. federal district court has dismissed the lawsuit filed by Morgan Drexen against the CFPB that alleged the Bureau’s structure was unconstitutional because it violated the Constitution’s separation of powers. Approximately one month after Morgan Drexen’s filing, the CFPB filed an enforcement action against Morgan Drexen in federal district court in California alleging that Morgan Drexen charged unlawful advance fees for debt relief services and engaged in deceptive acts and practices. Morgan Drexen responded by filing a motion for a preliminary injunction in which it asked the D. C. court to enjoin the CFPB from prosecuting the CA action until the D.C. case was resolved. In addition to opposing the injunction, the CFPB then filed a motion to dismiss Morgan Drexen’s lawsuit or, in the alternative, for summary judgment. 

In its decision dismissing the lawsuit, the court agreed with the CFPB that injunctive relief was unwarranted because Morgan Drexen could raise its constitutional challenge as a defense in the CA enforcement action. It also agreed with the CFPB that dismissal was appropriate to prevent “procedural fencing,” observing that “the record reveals that at the time of filing suit, Morgan Drexen was aware of the likelihood of a Bureau enforcement action.” It commented that Morgan Drexen was seeking to “have this matter adjudicated in the forum of its choosing, depriving the Bureau of the choice of forum for its enforcement action-the Ninth Circuit.”  

The court also ruled that declaratory relief was inappropriate because, in asserting a constitutional challenge, Morgan Drexen was “essentially asking for adjudication of an anticipatory defense” to the CFPB’s enforcement action.   

Morgan Drexen’s lawsuit also named as a plaintiff Kimberly Pisinski, a Connecticut bankruptcy attorney who had used Morgan Drexen’s services. Ms. Pisinski had alleged that the she would suffer injury because the information the CFPB sought from Morgan Drexen through civil investigative demands (CIDs) included attorney-client privileged information. The court found that she lacked standing to challenge the CFPB’s constitutionality because she could not show the requisite injury from the CFPB’s actions. According to the court, she could have asserted the attorney-client privilege in defense to any attempt by the CFPB to enforce previously issued CIDs and had made “no effort to show a substantial probability of an imminent CID which would force her to turn over privileged information.” The court also found that she could not base standing on her claim that the CFPB’s regulation of Morgan Drexen would deprive her of their services. 

Another case challenging the CFPB’s constitutionality dismissed by a D.C. federal district court, State National Bank of Big Spring v. Lew, has been appealed to the U.S. Court of Appeals for the D.C. Circuit. In addition to challenging Director Cordray’s recess appointment, the case also included a separation of powers challenge.

 

It looks like the court is finally set to rule on the CFPB’s motion to dismiss in State National Bank of Big Spring, Texas, et al. v. Lew, et al., the case still pending in federal district court in Washington, D.C. that included a challenge to President Obama’s recess appointment of Richard Cordray.  While Mr. Cordray’s confirmation as CFPB Director may have mooted that challenge, the case also includes a  challenge to the CFPB’s constitutionality that is similar to the challenge made in the Morgan Drexen lawsuit filed on July 22.  In both cases, the CFPB’s structure and authority is alleged to violate the Constitution’s separation of powers.  

The State National Bank of Big Spring (SNB) case was originally filed in June 2012 by SNB  and two non-profit organizations in the metropolitan Washington, D.C. area.  In addition to the CFPB, the defendants included the Treasury Department, the other federal banking agencies and the SEC.  In September 2012, an amended complaint was filed adding as plaintiffs the Republican state Attorneys General of Oklahoma, South Carolina and Michigan.)   However, the state AGs did not join the portions of the amended complaint challenging the CFPB’s constitutionality or Mr. Cordray’s appointment. Instead, they only joined a newly-added challenge to the provisions in Title II of Dodd-Frank that give the Treasury Secretary “orderly liquidation authority” over financial companies.  (Subsequently, eight more Republican state AGs joined the complaint as plaintiffs.)   

In November 2012, the defendants filed their motion to dismiss in which they argued that SNB’s claim that the regulatory uncertainty created by the CFPB’s UDAAP authority caused SNB to exit the mortgage business did not give SNB standing to challenge the CFPB’s constitutionality or Mr. Cordray’s appointment.  In response to SNB’s claim that it stopped providing remittance transfers due to the compliance costs associated with the CFPB’s remittance transfer regulation, the defendants argued that because the regulation was promulgated pursuant to the CFPB’s authority to implement the Electronic Fund Transfer Act rather than its UDAAP authority, the regulation did not give SNB standing to challenge the CFPB’s constitutionality based on its UDAAP authority.  They also argued that the SNB’s claims were not ripe because it had not shown any imminent threat of harm resulting from CFPB action. 

After holding a hearing on the motion to dismiss on  June 12, 2013, the court entered an order on  July 17 asking for supplemental briefs.  The private plaintiffs were ordered to file a brief addressing the effect of Mr. Cordray’s confirmation and the defendants were ordered to file a brief addressing SNB’s contention that it had standing based on the representation made by SNB’s Chairman that “But for the Bureau, its rules and its enforcement authority, the Bank would reenter the consumer mortgage and remittance market without limitation.” 

In their supplemental brief, the defendants characterize SNB’s alleged injuries as “self-inflicted” and argue that self-inflicted injuries do not give rise to Article III standing if they were incurred to avoid a future harm that is not certainly impending.  They claim SNB has not plausibly alleged it would face a “certainly impending injury” by reentering the mortgage and remittance markets.  In the private plaintiffs’ supplemental brief, SNB argues that
Mr. Cordray’s confirmation does not moot its claims because it continues to be injured by regulations unconstitutionally promulgated by Mr. Cordray.

In addition to the SNB case, we had also been following CFPB v. Chance Edward Gordon, a California case involving a challenge to Mr. Cordray’s recess appointment.  In the case, which was filed last summer, the CFPB alleged that an attorney and his law firm had violated the Consumer Financial Protection Act of 2010 (meaning Title X of Dodd-Frank) and
Regulation O, the Mortgage Assistance Relief Services Rule, by falsely promising loan modifications in exchange for advance fees. 

As part of their affirmative defenses to the CFPB’s complaint, the defendants had included a challenge to Mr. Cordray’s appointment.  On June 26, 2013, the court issued an order granting the CFPB’s motion for summary judgment on its CFPA and Reg O claims.  In denying the defendants’ summary judgment motion, the court found that the defendants had waived their challenge to Mr. Cordray’s appointment by failing to adequately “explain how, in the absence of a properly appointed or confirmed director, CFPB is unable to prosecute this action.”